Auditor’s Report

Auditor’s Report

Auditor’s Report

Following the engagement of an auditing and assurance practitioner to examine the financial statements issued by a listed company, a lengthy audit process commences for full-year statements in order to produce a standardized interpretation of their validity. This enables shareholders and other stakeholders to form sound judgements based on the level of assurance provided to them by the auditor at the conclusion of their work.

Following the audit’s completion, the auditor will produce an auditor’s report that details their opinion on the company’s financial position based on financial statements and other sources of information. The most common kind of auditor’s report is referred to as a review report, or unmodified report, which means that the auditor did not come across any evidence to suggest that the company’s financial statements present anything other than a fair and truthful depiction of the company’s financial position, and that all statements were compliant with relevant regulatory and accounting requirements.

Also known as clean or unqualified auditor’s reports, such a report is the most common variety issued by auditors following their work on the financial statements of a listed company. This is at least partly due to the fact that company management often becomes aware of problems or potential problems before the report is released, and makes the required adjustments in-line with the auditor’s findings.

Unmodified Auditor’s Report
It is important to remember that an auditor usually conducts a full analysis, or audit, of the full-year or end-of-year financial statements issued by a company or other entity, and that this is required by law in Australia. It is standard practice for the practitioner appointed to conduct the full-year audit to also conduct a mid-year review and provide ongoing consultation with company management and directors.

Following the mid-year review, which is at best a limited assurance measure, management and/or stakeholders may consult the practitioner to make adjustments based on the findings of their review. This regularly results in the end-of-year audit report being unmodified, because the company has addressed any relevant matters that could influence the level of assurance resulting from the report with assistance from the assurance practitioner following the mid-year review.

The issuing of an unmodified auditor’s report is effectively an indication that the auditor did not become aware of any information in the financial statements that could indicate that they present anything other than a fair and truthful indication of the company’s financial position, in-line with accounting standards set by the peak body as well as relevant legislation.

Important Sections of an Unmodified Auditor’s Report
The auditor may include additional sections in the report, such as other matter and emphasis of matter paragraphs. It is important to remember that these additional paragraphs, if they occur, do not indicate that the auditor has come to an adverse conclusion or that they have identified limitations in the company’s financial statements. These additional sections are regularly included in auditor’s reports where the auditor decides that users would benefit from a more comprehensive understanding of certain information which they consider to be fundamental to the interpretation and understanding of the financial statements.

The type of information included in these additional sections is specific to the position of the company that has been audited, and therefore will differ between reports and between companies and entities. The inclusion of additional paragraphs such as other matter and emphasis of matter paragraphs is not indicative of adverse conclusions, which are instead set out in a modified auditor’s report. We will further explain what constitutes a modified auditor’s report in later paragraphs, but first, let us view a few examples of what might be found in emphasis of matter or other matter sections of an unmodified auditor’s report.

Other matter paragraphs – These sections may draw the reader’s attention to inconsistencies in the company’s reported position and attempt to explain these inconsistencies. This is not an indication that the auditor has reached an adverse conclusion that affects the level of assurance available to stakeholders, it is merely a professional practice designed to obtain consistency in the information available to stakeholders.

For example, an other matter section of an unmodified auditor’s report may state that certain information included in a listed company’s annual report does not match all of the conclusions from the audit of financial statements. This might be an inconsistency between figures listed in an operational review and those included in the financial statements analyzed by the auditor. When included in an other matter section, this inconsistency is not considered to be a serious issue that should affect the decisions taken by shareholders or other stakeholders, but it is something that relevant parties should be aware of.

Emphasis of matter paragraphs – An emphasis of matter section on an unmodified auditor’s report seeks to clarify an important point, such as concern about a company’s ability to continue trading. This section is included where the relevant matter has been disclosed as required in financial statements analyzed during the audit process. This is an indication that the company has been truthful in its disclosure of important financial details, but that these details are deserving of emphasis and a heightened degree of scrutiny by stakeholders when making relevant decisions.

Modified Auditor’s Report
An auditor or assurance practitioner will issue a modified auditor’s report in the event that they believe the relevant financial statements include a misstatement or misstatements of key material. That is, the auditor believes that the financial statements provide an inaccurate or incomplete view for stakeholders when taken at face value.
An auditor may also release a modified auditor’s report in the event that they are unable to compile the evidence required to form an opinion, perhaps due to missing or misstated information in the financial statements that they have audited.

Generally, there are three main types of modified auditor’s report, which differ in the implications they carry for forming an opinion relating to assurance. These opinion statements are grouped into adverse opinion, disclaimer of opinion, and qualified (except for) opinion.

These different types of opinion that may be contained in the modified auditor’s report have important implications for the users of the report, and so the key differences between these types of opinion are explained below.
Adverse opinion – Adverse opinion indicates that the auditor has reasonable grounds to believe that information presented in the entity’s financial statements do not constitute a fair and truthful view of the entity’s financial position, and/or the financial statements do not comply with accounting standards. An auditor is likely to issue a statement of adverse opinion when they believe that the entity’s financial statements contain misstatements of key information that negatively affect the level of assurance available to stakeholders. For example, if a listed company has not applied the appropriate/required financial reporting techniques in the preparation of their financial statements, the auditor is likely to issue a statement of adverse opinion.

Disclaimer of opinion – A disclaimer of opinion is issued by the auditor in the event that they are unable to reach a definitive conclusion in regard to whether or not the financial statements offer a fair and truthful depiction of the entity’s financial position. This may be a result of the auditor being unable to gather sufficient evidence required to form an opinion on content or nature of the financial statements, therefore disclaiming their professional opinion. It is important to note that this does not indicate that the entity responsible for the financial statements has engaged in negative conduct, it merely indicates that the auditor lacks the means of reaching a conclusive opinion on the financial statements and their implications for stakeholders. For example, the entity’s information system used for financial reporting may have malfunctioned, resulting in the loss of key data required by the auditor to reach a definitive conclusion.

Qualified opinion – Also known as an except for opinion, qualified opinion is issued in the event that the auditor believes the financial statements provide a fair and truthful depiction of the entity’s financial position, and that they comply with accounting standards, except for a specific component or matter included in the financial statements. The issues that result in a qualified opinion statement being issued by the auditor are then described in more detail in separate sections of the auditor’s report, enabling stakeholders to inform their own decisions on the matter/s.
Examples of circumstances where the auditor may present a qualified opinion include:
• The entity’s management has included a view of an asset’s value in their financial statement which differs from the view taken by the auditor, but besides this the financial statements provide a truthful depiction of the entity’s financial position.
• The auditor is unable to verify a particular component of the financial statements, but is able to verify the other components and is satisfied that they are free of misstatements.

How To Tell If an Auditor’s Report Has Been Modified
For those who need to know whether or not the auditor’s report has been modified, the answer lies in the document’s ‘opinion’ section. This is where the auditor includes their personal view of the information contained in the financial statements, in line with the above types of opinion. If no opinion section is included, then the auditor’s report has not been modified.

The opinion section is found towards the end of the document, where the auditor usually includes their details and signature. This is where the auditor makes their concluding remarks, and there should be a statement here to qualify whether the auditor believes that the entity’s financial statements offer a truthful and fair depiction of the entity’s financial position.

Once again, it is very important to look for sections titled other matters etc. Even if the auditor’s report is ‘clean’ or unmodified, there may still be certain clarifications to take into account. These are stated under specific matter sections of the report.

Does an Unmodified Auditor’s Report Mean the Entity Is in Good Shape?
Auditor’s reports are designed to convey whether or not an entity’s financial statements are in-line with accounting standards and relevant legislation, so that stakeholders may form an opinion with the appropriate degree of confidence. Auditor’s reports are not designed to identify whether or not an entity is profitable or successful, they merely confirm whether or not stakeholders are able to use the entity’s financial statements to make assessments of the entity’s performance.

If the auditor’s report is unmodified, then the financial statements released by the entity are in fact an accurate depiction of their financial position. This position may be good or bad, all the relevant information will be in the financial statements available to shareholders.

Auditors are often involved in assisting management with financial affairs such as assumptions of going concern etc. This information is then used in the preparation of financial statements, but cannot be used as a conclusion on the financial wellbeing or solvency of the entity.
Auditor’s Reports Summary
In conclusion, auditor’s reports are designed to provide shareholders with a conclusion regarding the degree to which they can trust an entity’s financial statements. If an auditor’s report does not include modifications, or areas where the auditor is obliged to state their opinion in regard to the information contained in the financial statements, then the information in those statements can usually be used to form an educated opinion.

This is a vital part of the assurance process, and understanding the details contained in opinion sections or other modifications is vital to forming a position of confidence in an entity’s position. Just because an auditor’s report does not contain modifications, it is not appropriate to conclude that the entity must be profitable or even viable. The purpose of an auditor’s report is, after all, the convey to stakeholders whether or not the information contained within the entity’s disclosed financial statements provides an accurate and fair depiction of their financial position.

An auditor’s opinion, stated in a modified auditor’s report, can be used to identify areas of potential concern for shareholders and things they might do to rectify these concerns.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at admin@kingstonknight.com.au.

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